Earlier this week, the District Court of Queensland delivered a decision which has the potential to have a substantial impact on all domestic building contracts where the contract price exceeds $20,000. The decision of Barlow KC DJC in Perera v Bold Properties (QLD) Pty Ltd  QDC 99 makes critical findings in respect of three key areas of a domestic building contract:
- the level of certainty required in a clause purporting to entitle a builder to price increases for labour and material costs;
- the contents of the warning required by section 14(6) of Schedule 1B of the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act); and
- the location of the warning required by section 14(6) of Schedule 1B of the QBCC Act.
Relevantly, these findings were made in consideration of a standard form Housing Industry Australia New Home Construction Contract entered into between the parties which included a Special Condition (Special Condition 7) which purported to allow the builder to increase the contract price where commencement had not taken place by the anticipated start date.
Level of certainty required in price increase clauses
Special Condition 7 provided the builder with the ability to increase the contract price by reference to “the current base price of the house type, which is the subject of this contract…to the builder’s current base price for that house type” where the builder failed to commence the works by the anticipated start date. It was solely a matter for the builder to decide whether to increase the contract price under this Special Condition and to determine what that increase would be.
Barlow KC DJC held that, in circumstances where the contract did not provide for the manner in which any increase to the builder’s current base price was to be determined, Special Condition 7 purported to allow the builder to “increase the price based on unstated objective criteria, [and] effectively purported to enable the respondent to change an essential term – the price –without any reference to any such criteria. That makes the clause and its potential effect uncertain”.
It was held that Special Condition 7 was unenforceable as a result.
Contents of the warning required by section 14(6) of Schedule 1B
Section 14(6) of Schedule 1B of the QBCC Act relevantly provides that if a domestic building contract where the contract price exceeds $20,000 contains a provision enabling the contract price to be changed, the contract must contain a warning to that effect and a brief explanation of the effect of the provision allowing change to the contract price.
In considering this section of the QBCC Act, Barlow KC DCJ stated that section 14 of the QBCC Act “clearly intended to constitute a form of protection of consumers by warning them clearly of the circumstances in which the contract price (even in a “fixed price” contract) may change”. Through this reasoning, it was held that it is not sufficient for a warning to simply list the relevant provisions/clauses of the contract and to state that they allow for changes to the contract price. Rather, the warning must also contain a brief explanation as to the effect of each provision/clause allowing for such change.
This is a substantial departure from what has previously been considered in the industry to be a ‘brief explanation’. Even the QBCC’s own suite of domestic building contracts, would fall foul of this more strict interpretation.
Barlow KC DCJ concluded that a clause purporting to change contract price in the absence of a compliant warning will be void. This would include all clauses that could result in price changes including clauses relating to variations, latent conditions, delay costs, and adjustments to prime costs and provisional sums.
Location of the warning required by section 14(6) of Schedule 1B
Section 14(7) of Schedule 1B of the QBCC Act states that the warning must be located in a prominent position on the first page of the contract schedule. The Court took a strong stance in this regard, finding that “the QBCC Act unequivocally requires that a warning be on the first page of the contract schedule. The warning must be entirely on that page. Any attempt to amend the warning by a clause that is not on that page cannot succeed. It would make a mockery of the requirement that a warning be on that page and contain the necessary requirements of such a warning”.
Accordingly, attempting the amend the pre-printed warnings in any standard form contract by a special condition would not satisfy this clear statutory requirement.
Overall effect on residential building contracts moving forward
The effect of the decision is twofold:
- it confirms that provisions purporting to entitle a builder to increase the contract price must contain certainty as to when that price increase will apply and how it is to be calculated; and
- it provides that a builder will not be entitled to rely on a provision in a contract to increase the contract price where the contract does not contain a warning on the first page of the contract schedule with a brief explanation as to the effect of that clause in accordance with section 14(6) of Schedule 1B of the QBCC Act.
The decision also highlights important considerations as to when a contract term providing for a price increase will be considered an unfair contract term under section 23 of the Australian Consumer Law (ACL).
Ultimately, this decision is a timely reminder of the importance for builders to have their domestic building contracts reviewed regularly to ensure that they comply with not only with the mandatory requirements of Schedule 1B of the QBCC Act, but all legal requirements that may apply to domestic building contracts including the ACL. Given the potentially serious ramifications, the importance of such reviews cannot be overstated.
If you have any questions regarding contract reviews or would like us to assist with your current or future contract, please do not hesitate to contact our offices on (07) 3139 1874 or email us at email@example.com.
This article is provided for general information and educational purposes only and should not be taken to be legal advice. Each contract and set of facts are different and therefore you should obtain specific legal advice.